Business Associations Flashcards
CORPORATIONS FRAMEWORK
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Formations
- de facto and de jure corp
- piercing the corporate veil
- ultra vires acts
- promoter liability
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Corporate Management, directors and officers
- Duty of Care
- business judgment rule
- Duty of Loyalty
- Duty of Care
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Shareholders
- Rights
- meetings and elections
- voting
- inspection
- dividend distribution
- shareholder agreements
- shareholder derivative suits
- Rights
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Federal Securities Laws
- 16(b)
- 10b-5
- Fraudulent statements
- insider trading
- Sarbanes-Oxley
- Fundamental Changes
AGENCY FRAMEWORK
- Formation
- Principal’s duties and remedies
- Agent’s duties and remedies
- Authority - Principal’s liability for Agent’s contracts
- Scope - Principal’s liability for Agent’s torts
PARTNERSHIP FRAMEWORK
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General Partnerships
- Formation
- Partnership assets
- partner rights and duties
- relations of partner to 3rd parties
- partner liability
- Dissociation, Dissolution, and wind up
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Limited Partnerships
- Formation
- Limited Partner rights and duties
- Limited partner liability
- Dissociation, Dissolution, and wind up
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LLP
- Formation
- Partner rights and duties
- LL partner liability
- Dissociation, Dissolution, and wind up
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LLC
- Formation
- LLC Member rights and duties
- LLC member liability
- Dissociation, Dissolution, and wind up
Forming a Corporation:
What is it?
What makes a valid Corporation?
What if not valid?
What is lying about it being valid?
A corporation is a legal entity that exsist separate from its owner, which shields owners from personal liability for actions of the corporation.
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A dejure corporation is one that has filed articles of incorporations and meets all madatory statutory requirements.
Valid articles of incorporation must have
- initial agents name
- street address
- corporation name
- authorized # of shares
- name and address of incorporations
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A de facto corporation exsist with actual use of corporate power and good faith but unsuccessful attempt to incorparate
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A corporation by estoppel exsist when a person who deals with the business entity believing it is a corporation or falsely holds business out as a corporation is estopped from denying corp status
When do we need to PIERCE the CORPORATE VEIL?
Generally, shareholders are not liable for corporate debts. Courts or creditors may disregard the corporate entity and pierce the corporate veil by holding active shareholders personally liable for corporate debts when under the (1) totality of the circumstances, (2) limited liability is unfair.
Courts will pierce the corporate veil when:
- the corporate is acting like an alter ego when the corporate formalities are ignored and there is comingling of funds
- the corporation was undercapitalized initally and the mometary investment was insufficient. Undercapitalization looks at whether the corporation has adequate funds to cover potential liability at formation.
- there is fraud including a show of (1) false representation, (2) scienter, (3) intent,
(4) causation, (5) justifiable reliance, and (6) damages.
* there is estoppel and a share holder represents that he will be personally liable
When doe the DEEP ROCK DOCTRINE apply?
The deep rock doctrine applies when a corporation is insolvent and equity requires 3rd party creditors claims to be paid off before shareholders’ claims as creditors
When to raise Ultra vires?
If the company does an act, or enters into a contract beyond the powers of the directors and/or the company itself, then the said act/contract is void and not legally binding on the company.
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Ultra vires is not an effectiev defense
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May be raised when
- state seeks dissolution
- corp sues officer
- shareholder sues to enjoin
Share of stock issued
The article of incorporation authorizes # of shares and the types of shares and rights and limitations.
- Subscription agreement are for buying certain number of stocks
- There are different types of shares issues
- common
- preferred
- must state:
- number
- classification
- rights
- must state:
- Consideration is required
- par value - price stated
- treasury stock: previously issued and reaqcquired by corp
- board’s good faith- no par
- no preemptive right for exsisting shareholder when new issuance of stock for cash
Pre-incorporation Liability
Promoter duties must be done in good faith since there is a fiduciary relationship. Promoters have a right to reimbursement and is personally liable for any contracts entered into. The corporation is not liable unless it adopts contracts or accepts the benefits. However, the promoter would still be liable unless there had been a novation (substitution of a new contract in place of an old one). Promoters should NOT make profits on their deals.
Corporate Directors and Officers
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Actions of Board of Directors
- The Board of Directors must hold meetings, which can be regular meetings in accorfance with the bylaws without notice or special meetings requiring at least 2 days; notice
- quorum requirement
- present by any means of communication
- withdraw can break quorum
- dissent
- actions without meetingc need to be signed by all directos consent
- board may delegate authority to a committee or officer
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Duty of Care
- reasonable prudent person
- business judgement rule is a presumption that the directors and officers act in goodfaith and in corporations best interest
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Duty of loyalty - no conflicts of interest
- Under the duty of loyalty, a partner is to refrain from (1) competing with the partnership, (2) advancing an interest adverse to the partnership, or (3) usurping a partnership opportunity, using partnership property, or conducting partnership business to derive a personal benefit, unless the partner accounts to the partnership for such benefit, good faith rejection, full disclosure.
- This may be remedied by disgorging profits or turning over the opportunity
- Under the duty of loyalty, a partner is to refrain from (1) competing with the partnership, (2) advancing an interest adverse to the partnership, or (3) usurping a partnership opportunity, using partnership property, or conducting partnership business to derive a personal benefit, unless the partner accounts to the partnership for such benefit, good faith rejection, full disclosure.
- Duty of disclose material info
- Right of directors
- Compensation that’s fair at rate BoD determines
- Indemnification of liability
- Inspectioning corporate records
- Liability of Directors
- No personal liability generally unless D+O’s got unfair benefit or committed wrongful acts
- The Board of Directors must hold meetings, which can be regular meetings in accorfance with the bylaws without notice or special meetings requiring at least 2 days; notice
Corporate Shareholders
Rights of shreholders
- meetings
- voting
- right to vote by stock type
- voting by proxy allowed
- quorum requirement
- inspection
- dividends
Shareholder Agreements
- Voting trust shareholders agree in writing to transfer shares to trustee
- Voting Agreement to vote shares as agreed in writing
- Management Agreement valid for 10 years
- Restrictions on stock transfer upheld if reasonable
Shareholder Suits
- Direct suit for breach of fiduciary duty
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Derivative suit on corporations behalf for harm done to the corporation - reimbursed litigation cost
- Shareholder must
- own stock
- adequately represent corp
- make a demand giving shareholder 90 days to respond
- Shareholder must
Shareholder Duties
- Generally, shareholders don’t have a fiduciary duty. Modernly, controlling shareholders owe a duty care and loyalty
- no sale to looters who want to ahrm
- sale at premium: OK
Shareholder Liability
- Generally, Shareholds have no personal liability except in professional corps
Federal Securities:
16(b)
10b-5
Oxley
Under 16(b), any short-swing trading profits received within a six-month period by a corporate insider must be disgorged to the corporation.
- Corporate insiders are officers, directors, and shareholders owning 10% or more equity stock in the corporation
- Trading is making a profitable purchase and sale of company equity stock within a six-month period
Under 10b-5, liability for any person who employs fraud or deception in connection with the purchase or sale of any security by means of any instrumentalitiy of interstate commerce
- an insider is a director, officer, or sharehold or any other holder of material nonpublic corporate information
- establishing fraud requires a showing of
- intent to defraud
- material misrepresentation or ommission
- reliance on the representation/ommission
- purchase or sale of securities
- use of interstate commerce
- damages
- Sarbanes -Oxley enhanced corporate reporting requirements and increased criminal penalties
How can Corporations make Fundamental Changes?
Typical procedure for fundamental changes happens when
- the board adopts resolutions
- written notice to shareholders
- shareholders approve
- then the articles are updated and filed with the state
Fundamental changes can be in the form of
- mergers
- share exchange
- asset sales
- conversion of corporte form
- amending bylaws or articles
- Dissolution and wind-up
Dissenter appraisal rights may have corp purcase shares
Agency Formation
An agency relationship exsists when a principal authorizes an agent to act on her behalf and represent the principal in dealngs with third parties.
Need an agreement bewteen the parties to benefit the prinicpal, and the principal has the right to control the agent. All contract formalities are not required.
Duties of Agent and Principal
A principal’s duties are as required in the contract
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An agent’s duties include
- Duty of Care (Business Judgement Rule)
- Duty of Loyalty - no conflicts, no self-dealing, no usurping principal opportunities, no secret profits, and no commingling funds
- Duty of Obedience
- Duty to Communicate
- Express contractual duties
